How should Lib Dems embrace economic policy?

The British Liberal Democrats are setting up a policy working group on the "21st Century Economy". I was among over 200 people to volunteer to take part, but sadly I was not picked. Those that have been picked will face truly daunting quantities of advice and reading material, but nevertheless but doesn't stop me from offering my thoughts today. This time I won' focus on the hard content of any new policy, but on its all-important political framing.

So far as content is concerned, regular readers will have got the hang of it. I blogged about it last year as part of another Lib Dem initiative, recommending Four Themes. These themes are green growth, small is beautiful, humane public services and redistribution of imbalances.

This line of thinking is very compatible with Lib Dem values and should go down well with the membership. But it presents a political problem. It means overturning several beliefs that the British public policy establishment holds dear. These include that higher volumes of consumption of things are essential to economic health (and may even be a measure of it), and that large, centrally controlled systems and organisations are the most efficient. It amounts to a policy revolution. And revolutions make people uncomfortable.

It is essential for future political success for the Lib Dems to have one foot in the political mainstream - so that they are regarded as being basically a sensible party. If they aren't they will be condemned to the margins of politics like the Greens. It is the same dilemma faced by Labour supporters as they challenge capitalist ways. You do not secure lasting political progress in a democracy from the extremes.

The Lib Dems should therefore present a radical policy agenda in an un-radical way. It must be evolutionary, not revolutionary. The party needs to specify small steps forward, each of which is able to achieve demonstrable improvements, that will over time change the conventional wisdom.

This is why I particularly like the idea of Green Growth. it contains a highly constructive ambiguity. On the one hand it suggests that the party favours economic growth in the conventional sense, which the public has come to associate with better employment conditions and higher pay. But it does not quite say what is actually meant by growth - it could mean general wellbeing and quality of life rather than volume of consumption. Meanwhile the phrase unambiguously points to environmental sustainability. I strongly suggest that the Lib Dems make the phrase central to their proposition, or come up with something that does the job even better.

That's my first piece of advice. My next advice is that they need to tread very carefully around two hot political topics: free trade and macro-economic management (aka "austerity"). These may well be excluded from the policy group's formal scope, but the party's wider narrative cannot avoid tackling them.

Free trade is a totemic issue for the Liberal Democrats. It was the one of the key organising themes of its predecessor: the Liberal Party. That was in a different time and context, of course. The Liberals then saw free trade as a way of breaking the hold of the landowning classes, who sought to protect their business interests (especially agricultural) at the expense of high prices for the masses. But even now, it is clear that freedom of trade, and competition, is a good way of keeping consumer prices down and freedom of choice up. By and large the general framework of world trade is something that Lib Dems will be quite happy with.

But something has changed in the power balance. Free trade helps keeps prices down, but it also seems to be doing the same with wages, until you reach a globally mobile elite of senior managers and other professionals. And worse, the instruments of free trade can allow globally powerful businesses to legally challenge public policy. There are some particularly odious examples from the tobacco industry as they have successfully slowed down, though not defeated, the introduction of plain packaging of cigarettes. Intellectual property is another issue that needs to be examined with a sceptical attitude. It is promoted by many businesses as being akin to any other form of property right and fundamental to civilised existence, but it is often used to stifle freedom and innovation, rather than encourage it. It is a favourite means for the manipulation of profits to low tax regimes by multinationals.

And trade agreements make this a hot topic. Brexit adds to the relevance. There were already cogent arguments that the EU was using its free trade rules to block general public policy (such as restricting state subsidies to the steel industry - though liberals should see two sides to that argument). Brexit does let Britain off the hook for the proposed EU-US trade pact - TTIP - which is causing a lot liberal angst. But the country must decide what sort of trading relationships it wants, and how far to go - including whether to join multilateral pacts such as the nascent one in the Pacific, TPP, which the country could join if it left the EU (or so I read). I have to say that I am agnostic on this question. My faith in free trade pacts has been shaken, but not destroyed. But the issue is becoming a political touchstone, and the Lib Dems would do well to apply some serious thought to this area, rather than recycling old slogans.

The Lib Dems will also find a minefield confronting them on macroeconomic management. The left have decided to make opposition to "austerity" one of its organising principles. I suspect that is because they draw so much strength from public sector employees and people from places such as universities and charities that depend heavily on public largesse in some shape or form. But anti-austerity does not resonate amongst the general public, who generally get the impression (justified or not) that public spending benefits other people. Since the Greens and Labour have drawn away the more trenchant political voices on the left, the Lib Dems have the opportunity to strike a more nuanced tone. Austerity is an elastic idea, so it is quite possible to say that you are against it, but the party should not apply "homeopathic policy" - mouthing anti austerity rhetoric while diluting the substance - as this did not work well for the previous Labour leadership.

My advice is for the Lib Dems is to stay clear as they can from the word "austerity", and to strongly advocate higher levels of public investment in education (not just schools, incidentally) and green growth. Public services, though, must deliver value for money, and will need continued reform - though not the brainless outsourcing and "payment by results" favoured by the Conservative government.

So there are some hard questions and tricky politics. But as I said last week, the left has to develop a new economic narrative. Given the staleness of the economic discourse on the far left, the Lib Dems have real opportunity to take up thought leadership. There is a real prize to be taken here.

7 thoughts on “How should Lib Dems embrace economic policy?”

For anyone, on any part of the political spectrum, the first things to do is understand how our economy actually works. It works the same for all regardless. The basic theory was all done 70 or so years ago by economist like Keynes, Lerner, Kalechi and others.

It is just a matter of dusting off those old text books and having another read through them. True, there have been some changes to our economy since Keynes’ time. We aren’t at war, at least not in the same major sense, or on a gold standard any longer. Yet much of our thinking is still the same as when the pound was either pegged to gold or the US dollar.

The basic idea is not difficult. The UK economy has a GDP of £2.051784

Therefore total spending has to at least equal £2.051784 too. If it is any less we have deflation and recession as products don’t clear. If we want 2% inflation with 2% growth we need to make that £2.133855 Though I agree it is tricky knowing whether the extra spending will result in inflation or growth.

That spending can either be by Government or you and I. The Government can to some extent influence our spending by adjusting interest rates but it is a hit and miss process.

To get the precision required we have to have a sound fiscal policy. This doesn’t mean that Government should “balance the books”. There is no need for any currency issuer to do that, Instead the Govt needs to focus on balancing the economy by sensible demand management.

I don’t particularly disagree with that Peter, but I don’t think that is enough to create decent jobs where they are needed or do much about all the growth going into the pockets of a global elite. We also need to be bit wary of those text books in the post-Bretton Woods world of floating fiat currencies and globally integrated markets for goods and labour. Inflation does not work the way it used to – it typically affects prices of goods and leaves wages behind. And central bank policy has much less traction on price levels than it used to. Instead the typical effects of macroeconomic policy are on trade and investment flows between countries – and a modern policy needs to place close attention to these.

Well we aren’t talking about central bank policy. All the central bank can do is vary the level of interest rates. I’d hope we’d both agree that, while that may have worked temporarily in the past, the levels of interest rates are now so low that we’ve reached the end of the line. New thinking is required. Or maybe we go back to what we thought before the previous kind of thinking! ie Keynesianism!

We’re talking fiscal policy and there is really no alternative as far as I can see, except to put up with a permanent malfunctioning economy.

I’m not sure what you mean by ‘decent’ jobs. There’s always going to be jobs which aren’t popular. Like working in Mike Ashley’s warehouses. Unless we nationalised them, without compensation, and Newcastle United too? I’d be up for that!

But, more seriously, if the demand for labour increased then there would be alternative prospects for many workers. We can have all the employment laws we like, but ultimately there is nothing better for workers than the opportunity to quit a crap job and move somewhere else. The crap job may still exist but the Mike Ashleys of this world would then have to a living wage and treat their workers as people rather than units of labour.

“and there is really no alternative as far as I can see, except to put up with a permanent malfunctioning economy.” I don’t think any progressive political party should accept this. I was offering my thoughts on Lib Dem economic policy in the round, and not just fiscal policy.
By decent jobs I mean reasonably well-paid ones that confer dignity and respect to those that hold them. Of course if there’s more money circulating that will help, I would suggest that our problems are much deeper, and that they won’t be solved by tax handouts and minimum wage regulations. In terms of economics we need to understand why the best jobs gravitate to close to the political centres of power, and find ways of empowering economies elsewhere. This is the issue I and others are struggling with – and I don’t think the old textbooks are much help.

In terms of economics we need to understand why the best jobs gravitate to close to the political centres of power, and find ways of empowering economies elsewhere.

Don’t we understand already? In the UK, power and money are largely concentrated in London and the SE of England. So the solution is to move it, as much as possible, to the regions. The Blair government didn’t do too badly in that respect.

Governments can create and spend as much money as they please. But they shouldn’t overdo it because of the possible inflationary consequences. The SE of England is running close to full capacity, so the inflationary consequences of spending are much greater there. Whereas, the same money spent in the more depressed regions, and in Scotland and Northern Ireland will have a much less inflationary effect. We want reflation not inflation.

It’s quite within the Governments power to level the playing field by selective fiscal measures. There could even be a lower tax rate for Northern Ireland.

I don’t believe there is any need for any “struggling with” on this. It’s all easy enough to understand. It’s where money is spent as well as how much is spent that is important to our economy.

It’s the same story in the EZ too. Money spent in Munich will probably cause inflation. Money spent in Athens, or better still the Greek regions, probably won’t

Not everything is about fiscal policy Peter. A discussion of regional policy usually brings in such issues as education and skills, infrastructure, political devolution and real exchange rates. Personally I think theory of the firm and information economics is critical to understanding it. The point is that differential fiscal policy is ineffective – it so often leaves the region it is designed to help as weak as before. Blair/Brown’s policies were a case in point – except in Scotland, perhaps. It seems that the money is piped back to the prosperous areas by the private sector as fast as it is pumped in by the public.
And while we are on fiscal policy: consider this. Isn’t inflation in prosperous areas one way that real exchange rates can adjust to make the depressed areas more competitive? Fiscal expansion in Germany was often touted as part of the solution to the Euro crisis. Of course the ECB focus on inflation is another of its design faults – sometimes inflation in one part of a single currency zone is a good thing.